Pittsburgh Metro’s December jobs report disappointing

Summary: The latest employment figures for the Pittsburgh Metropolitan Statistical Area (MSA) is once again disappointing.  The area’s total private job gains fail not only to match the national growth rate, but also the growth rates of comparable metros.

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The employment figures for December 2018 recently released for the Pittsburgh MSA (Allegheny, Armstrong, Beaver, Butler, Fayette, Washington and Westmoreland counties) were not encouraging.  Private sector payroll employment (not seasonally adjusted) rose by just 8,100 (0.75 percent) between December 2017 and December 2018. This continues a trend of relatively weak growth that defined the local economy in 2018.  Seasonally adjusted data are not available for payroll data at the metro level. However, the 12-month-ago comparison eliminated most if not all seasonal effects and is a good measure of year-to-year gains.

To provide perspective, this Brief will compare employment growth in Pittsburgh to jobs gains in the metro areas of Columbus, Ohio, Indianapolis, Ind., Nashville, Tenn. and the national performance.  Data in all comparisons will be private employment changes from December 2017 to December 2018. Comparisons are presented for total private jobs, jobs in goods production and private service sector production as well as in the focused areas of manufacturing, education and health, and leisure and hospitality.

Nationwide total private jobs grew 2.02 percent from December 2017 to December 2018.  Indianapolis’ and Nashville’s MSAs job counts topped that by rising 2.31 and 2.14 percent, respectively, while Columbus’ MSA fell just short (1.72 percent).  Meanwhile, the 0.75 percent pickup in the Pittsburgh MSA was well short of not only the national growth but also the gains in the sample of comparable metros.

In the goods-producing super sector (which includes mining and logging, construction and manufacturing) employment nationally posted a solid 3.13 percent gain.  The highest jump among the metro areas belongs to Indianapolis (5.67 percent) with Pittsburgh coming in a distant second at 1.41 percent but not too far above Columbus (1.33 percent).  Nashville had a decline to its number of employees in the goods-producing super sector (-0.88 percent).  Much of Pittsburgh’s pickup, 80 percent, was in the construction sector.

At the same time, manufacturing employment rose 2.11 percent from December 2017 to December 2018.  While the Pittsburgh MSA had positive growth in manufacturing jobs (0.12 percent), it was not only well behind the national rate, it was much slower than Columbus (1.49 percent), and Indianapolis (1.41 percent) but ahead of Nashville, which was the only metro in this sample to see a decline in manufacturing jobs (-1.56 percent).

In the private service-providing super sector, employment nationally recorded a rise of 1.81 percent—a much slower pace than the goods-producing super sector.  In the group of metros, only Nashville exceeded the national pickup (2.64 percent).  Columbus’ (1.77 percent) was just below that of the nation closely followed by Indianapolis’ MSA (1.71 percent).  The Pittsburgh MSA followed well behind all areas with a mere 0.64 percent jobs gain.

A key private service-providing subsector is the education and health subsector, often known as “eds and meds.”  The Pittsburgh MSA prides itself on being strong in this area with its many hospitals and universities.  However, the employment gain in “eds and meds” from December 2017 to December 2018 was the lowest for all comparison areas at a paltry 0.47 percent. Nationally these jobs climbed 2.25 percent over the 12 months with the highest growth posted by Columbus (3.21 percent).  While the Indianapolis and Nashville MSAs came in below the national gains (1.86 and 1.72 percent respectively), the gains were far stronger than in the Pittsburgh MSA.

Leisure and hospitality job growth is the last sector examined. This sector includes the accommodation and food services subsectors (the largest subgroup) as well as the arts and entertainment subsectors.  The Pittsburgh MSA did quite well in the leisure and hospitality group posting growth of 2.33 percent from December 2017 to December 2018.  This was much better than the national growth of 1.18 percent and handily besting Columbus (1.06 percent), Nashville (-0.79 percent) and Indianapolis (-3.83 percent).

However, as has been explained in previous Policy Briefs, this is the one sector that perhaps does the least to boost economic growth because of very weak multiplier effect and low wages.  For example, statewide (timely wage data are not available by sector below the state level) the average weekly wage of all employees in the manufacturing sector was $881.50 in December 2018—a 2.17 percent increase over the weekly wages rate one year ago.  By contrast, the statewide average weekly wage for employees in the leisure and hospitality sector was just $385.79—up just 1.45 percent from its year-earlier posting. Manufacturing wages are more than twice as high as leisure and hospitality wages in Pennsylvania and contribute more to the state and MSA’s tax coffers, as well providing stronger multiplier effects.

Average weekly hours worked for each sector show workers in the manufacturing sector have much longer work weeks and far beyond those in the leisure and hospitality sector (41.6 hours vs. 25.1 hours).  It’s not hard to see why manufacturing jobs are more sought after than are those in leisure and hospitality—yet the latter sector is where the Pittsburgh MSA excels.

A primary reason that jobs growth continues to languish in the Pittsburgh MSA, and even statewide, are economic policies that make the business climate less friendly than other areas and consequently making it a less desirable place for startups and for existing businesses to grow.

The latest salvo aimed toward business is a plan announced by the governor to raise the minimum wage in Pennsylvania from the national minimum of $7.25 per hour to $12 per hour in 2019 with the ultimate goal of increasing it to $15 by 2025.

Apparently, no amount of evidence of the negative effects of large increases in mandated minimum wages will deter politicians who prefer to look concerned about incomes, as opposed to helping their states and regions grow businesses and employment with higher wages and produce strong demand for workers. Strong sales and good profits lead to higher wages in a competitive labor market. Avoiding this truism is not a good way to boost economic prosperity.

As long as Pennsylvania, and the region, continues to ignore the impact of policies on business friendliness—which seems to be the case—job growth will remain stunted and future disappointing jobs reports will be the norm.

Peers could point way on Port Authority performance

Summary: The state Auditor General’s Office recently released a performance audit of the Port Authority of Allegheny County (PAAC). State law requires the audit to be undertaken once every four years. Transit systems in comparable metro areas were used to measure transit performance. The next audit should utilize this peer group to see how PAAC compares on several critical indicators of transit operations.

The audit covered the period from Jan. 1, 2016, to Dec. 31, 2017. It focused on the mass transit agency’s hiring procedures (in the time period 330 new hires were added to bring the total headcount to 2,533 at the end of 2017) and how new service requests are processed.

It also reviewed bus and light-rail operations measured by on-time performance, the percentage of time vehicles are in service and passengers per revenue hour. To evaluate the Port Authority, four peer agencies (MTA in Baltimore, GRCTA in Cleveland, Bi-State in St. Louis and Metro in Minneapolis) were selected due to “similarities in city/metropolitan area populations, transit service levels, modes of service provided, or methods of route management,” according to the audit.

In the audit time period, vehicle in-service time was 85 percent for buses, slightly lower than the peer average of 90 percent which PAAC attributed to the locations of two bus garages and language in the collective bargaining agreement with the transit union on meal breaks. On passengers per revenue hour, PAAC ranked second behind MTA. To improve where lacking, the audit recommended a renegotiation of the collective bargaining provisions when the current labor contract expires in 2020 and different locations for garages to reduce time out of service.

While the audit is to be commended for looking at other agencies to benchmark PAAC’s time-related performance, quite a deeper look at the costs of mass transit service and how funding is provided could have been made part of the examination.

The National Transit Database (NTD) recently published 2017 data for transit agencies. All five agencies in the audit provide mass transit through various modes but bus trips accounted for at least 60 percent of all unlinked trips. The Port Authority was highest with 84 percent of all transit trips provided by bus. PAAC provided more bus trips per vehicle revenue hour than the peer group average (33.2 to 27.6) and only the MTA had a higher rate than PAAC (40.1 trips per hour).

Consider the following indicators:

Bus operating expense per vehicle revenue hour—This is the non-capital outlay required to deliver services divided by the hours buses are actually on routes picking up and discharging paying passengers, an indicator that we wrote about at length in a 2018 Policy Brief (Vol.18, No.18). PAAC’s expense was $187.02, which was higher than the peer group average of $143.95, a difference of 30 percent. Only MTA was remotely close to PAAC on this measurement at $174.13. That figure cries out for attention given the sizeable gap between PAAC and its comparable peer group. It would have certainly raised a red flag if included in the audit.

Salaries/wages/benefits—The Port Authority spent $301.9 million on salaries/wages/benefits in 2017. This was higher than the peer group average of $239.9 million by 26 percent. MTA and Metro were not far behind in dollar terms, with each spending $297 million on the category. The outlays for GRCTA and Bi-State were quite lower with both agencies spending less than $200 million. If the peers were selected for their similarities to PAAC, an obvious question should be why the level of salaries/wages/benefits was the highest of the five.

As a percentage of all operating expenses (which would include purchased transportation, materials and supplies and other expenses) PAAC had a share of 75 percent. This was higher than the peer group average of 66 percent. Only Metro had a higher percentage share at 79 percent.

Sources of operating funds expended—In presenting the audit findings the auditor general stated that transit fares should not rise and that “it’s critical that Harrisburg make greater investments.” Two agencies in the peer group, GRCTA and Bi-State, are primarily locally funded whereas Metro and MTA, along with PAAC, received at least 50 percent of all operating funds (federal, state, local and other) from their respective state. MTA received the highest percentage share, at 75 percent, while PAAC and Metro were at 56 percent and 60 percent, respectively. In dollar terms MTA’s state subsidy of $566 million was far greater than the $228 million received by both PAAC and Metro from their state governments.

To what level does the auditor general believe state subsidies for Port Authority should rise? And would that argument be made if the audit had included a comparison of operating expenses and payroll to the peer group to see how far above the others the agency is?

Future performance audits, beginning with the next one in 2022, should utilize the peer agencies to measure PAAC’s standing on operating expense per vehicle revenue hour, the amount and share of salaries/wages/benefits and the amount and share of state subsidy for the agency. Previous work has shown the costs here to be greater than in numerous other locales, including Boston, Washington, D.C., Columbus and Buffalo. Only New York City was found to be higher. With enough attention paid to these measures it might be possible to reduce the gap between the Port Authority and its peers.

PWSA’s 5-Year Plan

Summary: The Pittsburgh Water and Sewer Authority (PWSA) was placed by the state Legislature under the oversight of the state Public Utility Commission (PUC) in 2017.  The PUC was tasked with making sure the PWSA brought its operating procedures up to its guidelines and with forcing the agency to craft a long-term plan to replace/upgrade its aging infrastructure.  The first five-year plan has been released and this Brief looks at some of its details.

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2017 was a momentous year for the PWSA.  After a couple of water system issues spotlighted a frail and aging system that would be very costly to repair, the state Legislature placed the PWSA under the regulatory oversight of the state PUC (see Policy Briefs Vol. 17, Nos. 14, 29 and 49).  Act 65 of 2017 compels the PWSA to do two things: 1) bring its operating system into compliance with the rules and regulations of the PUC, and 2) put together a long-term infrastructure improvement plan for the replacing/upgrading of its systems, both water and sewer conveyance.

PWSA’s plan, covering the first five years, 2018 to 2023, was submitted to the PUC in September 2018 and is now being reviewed by the PUC.  News reports note that after obtaining public input, the PUC has until November 2019 to accept outright, accept pending the PUC’s recommended changes or reject the plan.

The proposed plan spells out the details of the two systems’ infrastructure components.  The water system is very old and much of it is well past its expected life span with an estimated average age of over 80 years.  Forty percent of the system was installed prior to 1920 and 86 percent was built prior to 1970.  It is comprised of over 1,000 miles of water lines of which 964 miles are water mains.

While the entire system has not yet been adequately cataloged and updated, the PWSA says it is using a Geographic Information System that is constantly being updated to get a more accurate picture of the system’s health. However, given the extreme age of much of the system, estimates of needed immediate and near-term replacements are just that. It is almost impossible to know with certainty where potentially calamitous breaks might occur.

The water system contains two treatment plants (one rapid sand and one microfiltration), eight distribution pump stations, four reservoirs (three covered, one not), 10 distribution storage tanks/reservoirs, two finished water pumps, one raw water pump on the Allegheny River, 24,900 valves and 7,450 public fire hydrants.

While the PWSA does not treat sewage—the Allegheny County Sanitary Authority (ALCOSAN) does—it does have a conveyance system to ALCOSAN that needs to be looked at as well. There are 1,213 miles of sanitary, storm and combined sewer lines in the system.  The system also has four wastewater pump stations, 30,000 inlets, 29,000 manhole covers, 185 storm sewer outfalls and 38 combined sewer overflow outfalls.  Approximately 77 percent of the sewer system is combined with storm water, which by federal consent decree, must be separated. There are 24 neighboring municipalities that convey wastewater through PWSA lines for which they do not provide a cost share to PWSA.

Obviously, the system is immense and will take many years and billions of dollars to fix it in its entirety.  The proposed five-year plan covering 2018 through 2023 will be the first of several such plans. Recall that a similar comprehensive plan by an engineering firm from 2012 proposed a 40-year time frame recommending eight five-year plans, for overhauling the entire system.

According to the five-year capital improvement plan submitted to the PUC, the top priorities are “the Aspinwall Water Treatment Plant, replacement or rehabilitation of the two major (treated) or finished water pumping stations, upgrades to storage facilities; replacement of critical transmission lines; continuation of the lead service line replacement program; and acceleration of the small diameter water main replacement program with an overall five-year budget of approximately $775 million.”  Small diameter pipes (8 inches or smaller) are scheduled to be replaced in one percent of the system (720 miles) in the next five years.  The lead service line replacement program has been well underway, replacing more than 2,700 lines from 2016 to 2018 and plans to be finished by 2026. It has been under a Pennsylvania Department of Environmental Protection order to do so since 2016.

As was mentioned in a state Auditor General’s report from 2017, the city had an agreement with PWSA to provide bulk water to city properties (600 million gallons per year) and that many city properties were not metered.  As part of this plan, the PWSA will also be installing meters at approximately 200-400 sites that are currently unmetered along with another 500 properties that pay a flat rate but do not have a meter.  The cost of this part of the program will be billed to these customers and is expected to take five years to complete.  The PWSA does not provide an estimated cost per meter.

This five-year plan also includes wastewater system renewal priorities that have a budget of $155 million over the five years.  The total budget for the three project areas comes to $930 million.

In sum, this plan calls for spending a very large amount of money.  And it represents only the first five years of repairs and replacements.  As was noted in an earlier Policy Brief (Vol.17, No. 14), the PWSA carries a large amount of debt.  In 2015 the amount of net total bonds and loans stood at $763 million before increasing to $866 million at the end of 2017 (2017 audited financial statement).  The net position of the PWSA at the end of 2017 was negative $43.8 million—up from 2015’s negative $35.7 million but better than 2014’s negative $59.1 million net position. And this figure depends on what can only be an estimated value of the system’s infrastructure.

In the plan, the PWSA states that “current planned improvements will be funded through both current rates and rate increases, as well as through revenue bonds, a capital line of credit, pay-as-you-go funding, and PennVest low interest loans.”  It will also explore federal funding through the Water Infrastructure Finance and Innovation Act of 2014, which offers low fixed-interest rates and flexible terms.  It will also look to potential private-public partnerships where possible—and if allowed by the mayor and council who have been unalterably opposed to privatization.

In September 2018 it was reported the PWSA petitioned the PUC to increase rates across its customer base, including 17 percent on residential customers and 10 percent on educational and health care organizations. In 2018 the PWSA’s budget show receipts from water totaled $109.7 million.  With an estimated composite average rate hike of 13.5 percent, those receipts should climb another $14.8 million. If approved the new rates will take effect in April 2019 and remain through 2020.  It will likely be the first of a several rate increases for PWSA customers in the coming years.

And, of course, the plan’s estimates of costs are just the direct monetary cost of the replacement and repair to be borne by the PWSA. There will be other huge costs, some non-monetary, imposed on the citizenry as streets are closed during work on the water lines. Add to that the lost revenue and output of businesses whose patrons and employees cannot get to them.  Nor do the PWSA’s costs include the serious inconvenience of water service being cut off to communities for extended periods.

According to the plan, in 2014 through 2017 annual capital spending was under $40 million per year. Spending increased to $70 million in 2018 and is projected to balloon to $330 million by 2021 before dropping a bit to $265 million in 2023—in all $1.35 billion over five years.

But this is the price that has to be paid because of years of failing to address the problem of antiquated system components. Bear in mind, too, that PWSA funds were misused by past administrations to shore up city budgets rather than investing in needed repairs.

Still this plan, though too long in coming and purposely delayed, is the first step of many to insure a properly functioning reliable water and sewer system for Pittsburgh.

Pa. begins long climb back to adequate pension funding

Summary: This month newly hired state workers will choose from one of three pension benefit options, all containing a defined contribution element. This is a result of Act 5 of 2017, which will affect new public school employees starting later this year. While Pennsylvania’s pension plans were once in strong funding shape, they fell relative to other states for reasons explained by a commission created by the same legislation.

Once upon a time, back in the early 2000s, the funding ratios of Pennsylvania’s two state-level pension systems—the State Employees’ Retirement System (SERS) and the Public School Employees’ Retirement System (PSERS)—were in enviable shape. The combined assets of the plans exceeded the liabilities and the result was a funding ratio of over 100 percent.

Yet as of June 30, 2017, the combined ratio hovered around 58 percent. Based on a ranking of states based on the aggregate funding ratio of their pension plans, the Pew Charitable Trusts placed Pennsylvania 44th. The funding ratio was 20 points better than the combined seven plans administered by New Jersey, which was ranked last, as well as plans in Kentucky, Illinois and three other states but a far cry from the ratios in Wisconsin, South Dakota, Tennessee and New York, which were above 90 percent funded based on their ratios.

According to Pew pension data in years from the mid-1990s to the mid-2000s the state made 100 percent (or more) of the actuarially required contribution, but then the contribution fell to 50 percent and is now back to 100 percent as of 2017. Other well-funded states likely did not diverge from making required contributions. In 2009, while Wisconsin contributed 108 percent of its required contribution, Pennsylvania put in 31 percent.

So what happened? The reasons are well known by now but were recently articulated in a report of the Public Pension Management and Asset Investment Review Commission (the commission), created by Act 5. The report stated “the unfunded pension liability was not a sudden occurrence. Rather it was the direct and foreseeable consequence of past policy decisions, principally deferring actuarially determined contributions as well as investment underperformance.” Laws passed in 2001 (Act 9), 2002 (Act 38) and 2003 (Act 40) that provided a substantial increase in pension benefits, lowered the vesting period, gave a cost-of-living increase to retirees and capped employer contributions and spread out obligations are primarily pinpointed as a major cause of the current situation. The report shows that the largest contribution deficit came right at the time of the 2008 recession.

The commission, in analyzing the 2017 unfunded liability of $44 billion for PSERS, attributes $18.3 billion (41 percent) to “employer underfunding,” $16.2 billion (37 percent) to “investment performance,” $7.8 billion (18 percent) to “benefit enhancements” and $2 billion (4 percent) to “changes to actuarial components.” Employer contributions for both PSERS and SERS totaled $5.8 billion in fiscal year 2016-17.

The thrust of Act 5 is to place new hires (with the exception of those classified as hazardous duty) of SERS (starting Jan. 1, 2019) and PSERS (starting July 1, 2019) into one of three pension tiers of the employees’ choosing. Two are hybrid plans that combine aspects of both defined benefit and defined contribution plans and one is a pure defined contribution plan. For these employees there will be no standalone defined benefit plan. There will be a higher retirement age and a longer time period to calculate final average salary.

Based on an analysis for prospective SERS members, an employee who would work for 35 years with an average salary of $40,000 that chooses one of the two hybrid plans would retire with somewhere between a $14,000 to $17,500 annual pension and an investment lump sum of $165,244. One choosing the defined contribution plan would retire with a $330,448 lump sum.

Under current projections the funding ratios of SERS and PSERS are to reach into the 70 percent range by 2030 and to nearly 100 percent by 2040. Separate from the benefit changes the commission recommended changes related to funding, stress testing, transparency and investing and asset allocation. The commission members estimate implementation of the recommendations—whether through legislative, executive or pension board actions—would lead to savings of $2.8 billion to $3.4 billion on a present value basis over a 30-year period. That depends on whether the suggested actions are carried out.

Since states cannot declare bankruptcy and state courts have interpreted the Pennsylvania Constitution’s language on contract impairment to apply to the pension benefits of employees once they commence service, the impact of pension benefit changes fall on new hires. Even if municipalities or school districts could enter into bankruptcy, the contract impairment provision would force them to make promised pension payments. Thus the biggest cause for contemplating bankruptcy, pension costs, would remain in bankruptcy.

Locally Pittsburgh, Allegheny County and the Port Authority have undergone changes to pensions and/or other post-employment benefits that solely affected new hires after a certain date of taking employment.

Too bad it took this long to get public employees of the state and school districts into pension plans that involve defined contribution. Hopefully the change will benefit taxpayers after several years, many of whom have seen their school districts raise taxes for several years to meet pension funding obligations. And tax hikes for 2019-20 are quite likely because of pensions and other benefits.

Another greatly disappointing year for Pittsburgh Public Schools

Summary: Despite the upbeat slogans continuously trotted out by Pittsburgh Public Schools, the academic achievement of its students continues to disappoint.  This Brief looks at the dismal performance of the district’s 8th graders on the state’s standardized test.

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A couple of years ago, the newly installed superintendent presented a new five-year plan. The slogan for the new regime was “Expect Great Things”—not much of an improvement on the “Excellence for All” slogan previously touted.  At that time the Institute argued that while the objectives in the plan were mostly laudable, the steps and programs to live up to expecting great things were not likely to produce great things for all students.  And the plan avoided mentioning its most glaring problem—outrageously high levels of absenteeism.

The single best measure of how the schools are doing is the demonstrated academic achievement of the children in the district’s charge. And for the majority of schools the achievement levels are woeful.

This Brief looks at 8th grade Pennsylvania System of School Assessment (PSSA) math exam results.

To be fair to the 8th graders in Pittsburgh, it should be pointed out that statewide, 8th grade scores are very weak.  In 2018, only 31 percent of 8th graders across the state scored at the proficient or advanced level. That means only 31 percent are actually ready to take on high school level work. And what is more startling is the large decline in the percent scoring proficient or above as students move to higher grades. In third grade 54 percent were proficient or higher but by 8th grade that percentage had fallen to 31 percent.  By 6th grade the percentage was already down to 39.6 percent. This could mean the tests get progressively harder or the concepts taught in each higher grade level rise in difficulty faster than the ability of kids to grasp them. Alternatively, it could mean that kids just become less enamored with learning and do not put in the necessary practice and study time.

In Pittsburgh 22 schools have 8th grade students although Pittsburgh Oliver has only 16 students and too few taking the math exam to warrant separate reporting.  Overall, 1,389 8th grade students took the PSSA exam.  Of that number 82, or 6 percent, scored at the advanced level and 192, or 14 percent, scored at the proficient level for a total of 20 percent proficient or better. This is 11 points lower than the state’s 31 percent proficient (21 percent) or advanced (10 percent).

But the Pittsburgh average score hides a very wide range of scoring by schools. Three schools (Colfax, CAPA and Pittsburgh Science and Technology Academy) with a total enrollment of 240 of the 1,389 total 8th graders taking the test (17 percent) accounted for 55 of the 82 students (67 percent) at the advanced level and 85 of the 192 proficient scores. Fifteen schools had combined totals of fewer than 20 percent of students reaching combined advanced and proficient levels. Eleven schools had below 10 percent of their students reaching advanced or proficient.

Shockingly, four schools had no students at the proficient or advanced levels (King, Sunnyside, Pittsburgh Oliver and Milliones). Two more schools had only one at the proficient level and no advanced (Langley and Morrow). A total of 10 schools had five or fewer students scoring advanced or proficient. In addition to the six just mentioned, Academy at Westinghouse, Allegheny Traditional Academy, Arlington and Carmalt were in the five or fewer students in the proficient or advanced category. The 10 schools combined had 380 8th graders take the math exam and of that number only 14 students scored advanced or proficient with just three at the advanced level. These results are a scathing indictment of Pittsburgh schools.

The other way to look at the scores is to combine the basic and below basic scores. Basic means some grasp but not enough to be considered proficient in the subject at that grade level.  Students scoring at the basic level will find the next grade subject matter very difficult. Students scoring below basic have totally inadequate mastery of the material and can look for forward to a really hard time in the next grade—since they will not be held back. And as they move up the students who were barely proficient in 6th grade will almost certainly fall further behind in the 7th grade.

And so on through their elementary grades. These students will likely never catch up as they keep moving higher in grades having no mastery of the previous grade. Indeed, they are destined to fall further behind. Thus, much of the teachers’ time is spent in remedial education for the basic and below basic levels.

This pathetic performance by such a large percentage of Pittsburgh’s 8th graders is not the result of inadequate spending.  The district’s current expenditures per student stood at $22,282 in school year 2016-17—the latest official state-reported statistics.  No doubt spending was higher in the 2017-18 school year.  By comparison statewide the spending is just over $16,500.

For a stark comparison, consider Peters Township in Washington County where current expenditures per student were $13,193. The 324 8th graders in Peters Township had 41 percent scoring at the advanced level and 41 percent at the proficient level for a total of 82 percent. Basic and below basic were 13 and 5 percent, respectively. Not a single school in Pittsburgh, even the best magnet schools, came close to matching the achievement by Peters Township 8th graders. And all for $9,000 less per student than Pittsburgh spends.

There is little more to be said about the situation in Pittsburgh Public Schools. It is a disaster for far too many students. It is stuck, and has been stuck, in a politically driven management and education mentality that are not only failing students but constantly finding excuses for why they should not be blamed. They claim more money, more programs and more decades of experimentation will get the job done. But, as old timers used to say, “That dog won’t hunt.”

Turnpike tolls rise for the 10th consecutive year

Summary: For the 10th straight year the Pennsylvania Turnpike Commission (PTC) is raising tolls. It is doing so and will continue to do so for the foreseeable future, as a result of legislation from 2007 that mandates the PTC to remit $450 million annually to PennDOT.  While many decry the rate increases, they also forget the misguided legislation that creates this situation.

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While we have written about this before (Policy Briefs: Vol. 7, Nos. 18, 38, 46 and 59; Vol. 12, No.5; Vol.13, No.3 and Vol. 14, No.2), it is worth repeating how the PTC arrived at this point.

In 2007 then-Governor Rendell sought to lease the mainline turnpike to fund the state’s transportation system of roads, bridges and mass transit.  That plan met with heavy resistance from all sides.  The Legislature then crafted what would become Act 44 of 2007.  The crux of Act 44 was to transfer ownership of Interstate 80 from PennDOT to the PTC.  The PTC would then toll Interstate 80 and give PennDOT $900 million per year beginning in fiscal 2009 and then rising 2.5 percent each year thereafter.  That money would then be split between road and bridge projects and mass transit.

But, as the Institute warned on several occasions at that time, tolling Interstate 80 required permission from the federal government.  Federal government guidelines require that any toll revenue from a federal interstate highway must be reinvested in that highway—and not on other purposes as was proposed in Act 44.  After asking for permission and being denied three times, Act 44 had to be revised. Even though permission to toll Interstate 80 was not granted, the revised legislation kept the PTC on the hook for payments to PennDOT, albeit at a reduced rate of $450 million per year starting in fiscal 2011 (after paying $750 million in fiscal 2008, $850 million in fiscal 2009 and the full $900 million in fiscal 2010).  Act 89 of 2013, which raised the oil company franchise (gas) tax to help fund road and bridge work across the commonwealth, reduces PTC’s remittance obligation to PennDOT to $50 million starting in fiscal 2023.

As mentioned above, the money from turnpike tolls was to be shared between road and bridge work and mass transit. Strangely and perhaps questionably, the money going to support mass transit is not mentioned in recent news reports although is clearly a vital part of the revised Act 44. Of the current $450 million payment made to PennDOT, the PTC’s Comprehensive Annual Financial Report (CAFR) from fiscal 2018 notes that $200 million of the scheduled annual payment supports road and bridge projects and $250 million supports transit throughout the commonwealth.

Thus, more than half of the mandated payment goes to the state’s transit systems. It does so by placing this money in the Public Transportation Trust Fund, which was created through Act 44, along with money from the state sales tax, lottery funds for the Free Transit for Senior Citizens Program, state bond funding for capital projects and the remainder of the Public Transportation Assistance Fund (after funding payments on existing debt).  According to the Port Authority of Allegheny County’s Single Audit for fiscal 2017 (most recent available), it received $205.9 million from the Public Transportation Trust Fund (requiring a local match of $33.7 million) that year.

In order to make this $450 million payment to PennDOT, the PTC has been issuing debt for that purpose for several years.  Total debt issued by the PTC includes non-traffic related debt linked to the Oil Franchise Tax revenues and Motor License Fee revenues (PTC’s fiscal 2018 CAFR).  Only debt issued against mainline tolls are used for the Act 44 payments.  In fiscal 2007 the total mainline outstanding debt was $1.7 billion ($8.93 per vehicle).  For fiscal 2018 that amount has ballooned to $12.2 billion ($60.70 per vehicle)—more than seven times greater in just 11 years.  So far, the PTC has paid PennDOT $6.1 billion in Act 44 payments since fiscal 2008.  Thus, of that debt total of $12.2 billion, 50 percent is the borrowing to cover the mandated payments to PennDOT.

Meanwhile, gross toll revenue has nearly doubled, rising from $624.5 million in fiscal 2008 to $1.2 billion for fiscal 2018.  While toll revenue may be able to cover the mandated $450 million payment to PennDOT and even the total interest and bond expenses, the PTC still has its own expenses to meet.  Total operating expenses for fiscal 2018 were $874.1 million.  The loss before capital contributions (operating revenues minus operating expenses plus PennDOT payments and the total interest and bond expense) for fiscal 2018 was $647.9 million.

All this borrowing has severely eroded the PTC’s financial position.  In fiscal 2018 the PTC had total assets of $8.9 billion and total liabilities of $14.5 billion for a total net position of -$5.6 billion.  With an increasingly negative net position—and the decreases in the net position have been happening annually since fiscal 2008—the cost of borrowing will almost certainly rise over time.

So how have the toll increases affected traffic on the system?

In fiscal 2008 there were 189.6 million vehicle transactions on the turnpike system with 164.1 million passenger vehicles and 25.5 million commercial vehicles.  By fiscal 2018 the number of vehicle transactions bumped up by just 6 percent (201.2 million).  Passenger vehicles transactions rose by just 5 percent over the period while commercial vehicle transactions jumped by 12.5 percent.  It has affected the composition of traffic as 86.6 percent of vehicles using the turnpike in fiscal 2008 were passenger (class 1) vehicles and in fiscal 2018 that had declined by nearly one percent (85.8 percent).

Importantly, however, the number of miles traveled has declined for both classes of vehicles. In fiscal 2008 revenue miles per passenger vehicle stood at 27.2 miles and for commercial vehicles it was 51.3 miles.  In fiscal 2018, passenger revenue miles per vehicle fell slightly to 26.7 while for commercial vehicles it fell more dramatically to 45.2 miles (12 percent).  Perhaps commercial vehicles are not able to pass along to their customers the increased cost of using the turnpike and may be finding alternatives to using the system.

The decision to use toll money to fund Pennsylvania’s transit problems—both road and bridge and mass transit—was a very poor one.  It has placed the PTC at a disadvantage as it needs to keep borrowing to meet obligations and raising tolls to make it work. At some point the toll increases will start to adversely affect the usage of the system, as the revenue miles traveled data is starting to show, especially with the commercial vehicles.

Another problem soon to face the commonwealth is a lawsuit filed by a truckers’ association that the strategy to use toll revenues to fund something other than the road itself runs afoul of federal law.  It was successful in suing New York, which used tolls to fund improvements to its canal system and have now turned their attention to Pennsylvania.

As a result, the PTC is not making current payments to PennDOT and instead putting that money aside pending the outcome of the lawsuit.  What if federal courts find for the truckers again?  Will they win back-tolls? And how will the current governor and Legislature react regarding transportation funding?  Needless to say, this lawsuit and possible ramifications of a ruling against the Pennsylvania Turnpike Commission will be extraordinarily important and will require close monitoring and analysis.

Optimism rose among Pennsylvania business leaders in 2018

Summary: A survey of business executives from across Pennsylvania showed optimism about the state’s business climate.  However, they credited federal tax cuts and regulatory relief as the main reason for the optimism and not anything being done at the state level.

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The Lincoln Institute of Public Opinion & Research released its biannual Keystone Business Climate Survey for fall 2018.  The survey was completed by 118 business executives, 81 percent of whom are owners with another 12 percent the chief officers or state/local managers. The survey posed questions regarding business conditions and policies in Pennsylvania. A majority of respondents reported that economic growth was continuing in 2018.  Federal tax cuts and reduced regulatory burden are credited by respondents for the sustained growth. At the same time respondents see little change in the state’s policies toward business.

Responses from the fall 2018 survey point to a continued upswing in business conditions and confidence which was also noted in the spring 2018 survey. On the question of whether business conditions in Pennsylvania were better, the same or worse than six months ago, there was a two-percentage point increase in “better” than in spring 2018 and a drop of 8 percentage points of those replying to “worse.”  Additionally, compared to the spring 2018 survey, there was a 10-percentage point increase in respondents indicating their companies’ sales had increased over the last six months. This jump in the number of businesses experiencing increased sales is quite impressive considering it was only six months between the two surveys. Overall, the fall 2018 business survey results confirmed the spring survey findings of continued confidence, job growth and increased sales in Pennsylvania.

Several questions focused on federal actions concerning businesses. Respondents were polled regarding the passage of the Federal Tax Cuts and Jobs Act of 2017 and asked if their business had taken any number of actions as a result of the legislation and were allowed to select all that applied. The responses were overwhelmingly positive. The actions with the greatest percentage of responses were “expanded employee hours” and “expanded business.”  The categories “increased employee compensation,” “started a new product line” and “hired new employees” each had a high response rate. It’s clear the Federal Tax Cuts and Jobs Act of 2017 has stimulated job growth as well as business growth in Pennsylvania.

One question asked if the current federal administration’s regulations delivered regulatory relief. A sizeable number of business owners replied that it did; 16 percent noted significant regulatory relief and 49 percent said they had experienced regulatory relief.

While federal policies have aided economic growth in Pennsylvania, a state proposal would inhibit economic gains. Governor Wolf, along with the Department of Labor and Industry, created an increased overtime pay threshold proposal. The rules were released in The Pennsylvania Bulletin in June 2018; comments and testimony in support of or opposition to the proposal were collected until August 2018. The state Department of Labor and Industry is expected to make a decision sometime in 2019. If the proposal becomes the official state rule, the threshold of overtime pay for salaried employees would increase from $23,660 annually to $31,720 annually by January 2020. It would be increased to $39,832 by January 2021, $47,892 by January 2022 and then be updated every three years following.

Survey respondents believe difficulties will occur if the proposal is imposed with 35 percent saying it would have a significant or some negative impact on business.

The proposal would be a huge detriment, especially to small businesses and non-profits, because it would force many companies to reduce hours and limit promotions. Currently, many employees have work flexibility, but that would no longer be the case if they were to be treated as hourly employees due to the proposed salary thresholds.

An additional question inquired whether business owners had made changes to lessen dependence on minimum wage labor due to proposals from both the state and federal government to greatly increase the minimum wage. A majority (61 percent) of business owners responded they have already taken steps to decrease reliance on minimum wage workers. Therefore, the overtime pay initiative is not necessary and employees would suffer as result of another misguided state economic policy.

The clear takeaway from the survey is that state economic policies should follow the recent federal policy changes including the 2017 tax cuts and regulatory cutbacks. The evidence of the dramatic effectiveness of the federal policies can be seen in the recent improvement in business conditions and optimism in Pennsylvania. The lessons are obvious:  It’s time for Pennsylvania to learn them and act on them.

In order to understand how truly significant the fall 2018 survey responses are, one only needs to compare them to the results of the fall 2016 survey. In just a two-year span a substantial change in the responses and outlook of business owners has transpired. For example, in the fall 2016 survey only 5 percent of business owners reported that business conditions were “better” than six months earlier while in the fall 2018 survey 40 percent responded conditions were “better.” Clearly, a dramatic shift has occurred in business owners’ confidence in the economy compared to late 2016.

Additionally, when asked if the company’s sales increased, stayed relatively the same or decreased during the past six months, business owners in the fall of 2016 reported a 21 percent increase while 40 percent reported a decrease in sales in the past six months. In the fall of 2018, 50 percent of respondents reported higher sales while 16 percent reported a drop in sales in the past six months.

Also, future expectations of employment levels significantly changed. In the fall of 2016, 16 percent expected higher employment levels in the following six months, 69 percent the same and 11 percent lower levels. In contrast, the fall of 2018 survey showed 37 percent expected higher employment levels in the following six months, 54 percent the same and only 6 percent lower—again highlighting the swing in optimism.

Regarding business conditions in the following six months in the fall of 2016, 5 percent answered better, 47 percent the same and 44 percent worse. In the fall of 2018, 30 percent answered conditions were better, 50 percent the same and 16 percent worse. The shift in business outlook in just two years is stunning.

The fall 2018 survey clearly points to much improved business optimism and faster growth in Pennsylvania as a result of federal actions and policies. For Pennsylvania to move to a still more vibrant and robust economy, state and local policies must be changed to foster free enterprise, competition and business startups.

This means a drastic reduction in governments’ involvement in the economy, lower taxes, fewer strangling regulations and a move away from trying to pick winners and subsidizing them with tax dollars.

Reviewing a busy 2018

As 2018 draws to a close we wish our readers a healthy and prosperous New Year.  We look back at some of our more memorable accomplishments.  2018 provided a wealth of policy topics for us to analyze and write about.  The following are some of the key highlights.

  • City government. We have examined the City of Pittsburgh’s finances for more than two decades.  Our attention intensified in 2004 as it entered distressed status, Act 47 and financial oversight from the Intergovernmental Cooperation Authority. In 2018 it finally exited Act 47 status, and while technically the ICA still remains, the city is free of distressed status.  The primary concern—a commuter tax—never came to pass and the city adopted Act 47 best practices.  We will continue our vigilance as the city goes forward.
  • Property taxes. We detailed appeal activity from 2017 and the decision by a Common Pleas court judge to reaffirm the right of taxing bodies to appeal.  We will continue to push for the need for regular reassessments.  We also looked at a proposal in the state Legislature to expand homestead exclusions for school property taxes.  We explained the proposal and analyzed the difficulties that would occur as a result of a shift from school property taxes levied by districts to a personal income tax.  That legislation died in the 2018 session.
  • Land banks. In 2014 we recommended that redevelopment authorities be empowered to handle the tasks land banks were set up to carry out.  In 2018, legislation was passed to do so and signed into law as Act 133.
  • The Institute opposed on solid grounds the referendum that would have imposed a countywide tax that would fund a nebulous children’s welfare program. Fortunately, the voters rejected it.
  • Pittsburgh International Airport. We documented PIT’s run of bad news in 2018.  We weighed in on the OneJet saga where, after giving the company subsidies to offer service from PIT, the company ceased operations in August and the Airport Authority filed suit to recover a loan.  Meanwhile it offered another subsidy to British Airways to offer service to London and then, shortly thereafter, Delta announced it was canceling its seasonal flight to Paris.  Qatar Airways received a subsidy for not reaching its goal of transporting 200 tons of cargo each week.  Finally, WOW airlines, another recipient of an authority subsidy, announced it was halting flights from PIT mid-January.  Perhaps the Airport Authority will learn its lesson from these failures and all the money it has wasted.  We will stay on it in 2019.
  • Pittsburgh’s professional sports teams. The Steelers, Pirates and Penguins requested $1.16 million from the Regional Asset District board to set up a capital repair fund for their facilities.  We stated that this is a very bad idea, especially considering how generous the leases are for these teams.  The teams responded with the partial release of a report documenting their value to the area.  We also debunked that report by noting how other area organizations, like CMU, provide a much better economic boost to the area.  The RAD board did approve $800,000.

We also examined other issues such as the high-cost of Port Authority’s bus operating expenses, the problems of the state university system and the shale impact fees.  In addition, we looked at the growth of the local and state economies and how the new school funding formula will affect districts in Allegheny County.

Our editorials, based on this research, are being regularly placed in newspapers across the state and our media appearances on both television and radio have been numerous.

For each topic we offer insights and challenges to conventional thinking. We will continue to do so to the policy challenges that arise in 2019 and offer approaches to problem-solving that emphasize the principles of free markets and good governance.

Merry Christmas

The staff of the Allegheny Institute wish our readers a peaceful, joyous and safe holiday season.

From the Book of Luke:

And there were in the same country shepherds abiding

in the field, keeping watch over their flock by night.

 

And, lo, the angel of the Lord came upon them,

and the glory of the Lord shone round about them:

and they were sore afraid.

 

And the angel said unto them, Fear not: for, behold,

I bring you good tidings of great joy,

which shall be to all people.

 

For unto you is born this day in the city of David a Saviour,

which is Christ the Lord.

 

And this shall be a sign unto you; Ye shall find the babe

wrapped in swaddling clothes, lying in a manger.

 

And suddenly there was with the angel a multitude of the

heavenly host praising God, and saying,

 

Glory to God in the highest, and on earth peace,

good will toward men.

 

Merry Christmas and a happy and prosperous 2019 from all of us at the Allegheny Institute.

 

Disappointing PSSA results for 2018

Summary: Pennsylvania has its third through eighth graders take Pennsylvania System of School Assessment (PSSA) tests annually. These tests are designed to assess academic achievement in three areas—math and language arts, as well as science, in fourth and eighth grades. Eleventh graders for the last few years have taken the Keystone exams in math, literature, and science rather than PSSA tests.  This Brief focuses on the PSSA scores.

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2018 scores for the state have been posted.  Student achievement is assigned to one of four levels: below basic, basic, proficient and advanced. Of course, the desired level is proficient or advanced. Advanced recognizes the student’s achievement to be above, or well above, the level necessary to move up to the next grade.  A proficient rating means the student has a grade-level mastery of the subject adequate to move on to the next grade. Basic means the student has some understanding but not sufficient to move on without remedial help. Below basic means the student has little or no grasp of the subject matter taught in that grade.

Suffice to say, the 2018 results are not encouraging.  First of all, the percentage of students scoring advanced or proficient in math fell slightly from the 2017 level in grades three, four, six and eight. The percentage advanced or proficient edged a bit higher in fifth and seventh grades. Only in third grade did more than half of students score proficient or higher, 54.5 percent in 2017 and 54.1 percent in 2018. That means that for every other grade the combined percentage of basic or below basic is above 50 percent.

The worst of the findings in the PSSA results is the sharp decline in scores with each higher grade in both 2017 and 2018. In 2018, the third grade combined basic and below basic percentage was 45.9. By sixth grade that combined percentage climbed to 60.5 percent and by eighth grade reached 69 percent.

English language arts scores tend to run higher than the math scores but remain well below levels the state should find acceptable. About 40 percent of students in each grade from third to eighth scored in the combined basic and below basic categories. And while better than the near 60 percent scoring basic or below basic in math in all grades but the third, 40 percent falling behind in third through eighth grades is a huge problem, especially for the high percentages of eighth graders who will be entering high school unprepared for ninth grade in math and English language arts.

Moreover, with only 53 percent of eighth graders scoring proficient or higher in the science portion of the exam, the inadequacy of preparation for high school is even more pronounced.

A very interesting statistic is found in the Education Department’s PSSA results report.  750,302 third through eighth grade students were tested in 2018. Of that number 414,495 are classified as historically underperforming. That means they are either economically disadvantaged, English learners or have an individualized education plan. A student falling into more than one of those categories is counted just once.

What an amazing statistic—55.2 percent of elementary school test takers are classified as historically underperforming (HU). It is stunning to contemplate that well over half of Pennsylvania elementary students are in the HU classification. One would assume that the bulk of these children are in the HU grouping because of economics. But that begs the question of how poor does a child’s family have to be to qualify as disadvantaged. And given that school and transport, and in many cases breakfasts and lunches, are free, it must be that the category is trying to capture something else that is detrimental to learning.

And as it happens, the HU students as categorized by the Education Department do underperform the average of all students; indeed they bring down the all-student average.  The underperformance occurs in all three subjects tested—math, English and science.  For example, in math 47 percent of the HU students in third through eighth grades scored below basic while the all-student average was 31.9 percent. Likewise the HU students had a much lower percentage of advanced or proficient at 25.2 percent compared to 42 percent for the all-student average. Using the state’s data for the average and HU student scores for the proficient or higher rating of third through eighth students, the scoring percentage for the non-HU students can be calculated. In math, those students would have had a combined proficient and advanced percentage of 62.7

And while the numbers for science and English are better, overall the pattern of HU students falling well short of the average scores is maintained.

How is it that “historically underperforming” seems to have a great impact on learning but not sports performance?  In 2017 Aliquippa’s 11th graders (59 test takers) performed poorly on math with 71 percent basic or below basic and only 27 percent proficient. And remember that the math test is on Algebra I which can be taken just before the exam. In science these students had 83 percent score basic or below basic.  Note that of the 59 test takers, 58 are classified as historically underperforming. Yet despite the inability of the vast majority of students to show meaningful academic achievement, the football team just won its 17th WPIAL championship in its division and another state title. Does this mean poor children cannot learn math or science but they can master a complex and demanding sport? Priorities appear to be misplaced.

Indeed, are there no academic requirements to play sports?

Pennsylvania needs to get over its excuse-making for poor academic performance, especially considering the sums spent on remedial education and other special programs aimed at improving quality of education.